Okay, so I have stuck my neck out and called, “No recession in 2008...” Since I wrote that last month, the generally accepted odds are 50/50 that we will slip into a recession this year. So I hope the coin falls my way, and I stand by my bullish bet.
But beyond the current slowdown, what I see on the government's fiscal horizon worries me more.
The focus among the presidential candidates has dramatically shifted away from the Iraq War to the economy, with the next president and Congress facing some tough challenges as the federal budget approaches three key crossroads.
The outcome will dictate the likelihood of a strong construction climate, which is a significant component of our total Gross Domestic Product (GDP) and a key driver of overall economic prosperity for the next decade.
The Congressional Budget Office (CBO) makes some assumptions about the budget for the coming years that are not rooted in political reality. It projects if the economy grows as expected and Congress maintains current tax laws and spending, we will enjoy a budget surplus by 2012. But its first of three assumptions is the fate of the Bush tax cuts. CBO's optimistic federal budget surplus projection assumes Congress will allow the tax cuts to expire as scheduled at the end of 2010.
That would trigger the largest tax increase in history (almost $1.9 trillion over seven years), raising taxes on 115 million taxpayers, and returning to the tax rolls 7.8 million low and middle income families who now pay no federal income tax because of the Bush tax cuts. None of these options is attractive.
“Tax on the wealthy”
The second big assumption is maintaining the Alternative Minimum Tax, or AMT, at current levels. Because the AMT wasn't indexed for inflation, more middle-income taxpayers have become subject to this so-called “tax on the wealthy.” Mindful of the political consequences of doing nothing, Congress routinely adopts temporary fixes to forestall an explosion in the number of taxpayers subject to the AMT.
If Congress had not extended the latest fix at the end of 2007, the number of taxpayers affected by the AMT would have risen from 4 million in 2006 to 25 million in 2007. If no further changes are made, the number of taxpayers affected by the AMT is expected to grow to more than 56 million by 2017.
So what happens when the new president and Congress are forced to address these two issues? Extending the Bush tax cuts (and other expiring tax provisions) and indexing the AMT for inflation would reduce federal tax receipts slightly more than $3.2 trillion from fiscal years 2010 through 2017. In reality, much of that $3.2 trillion might not materialize due to a weaker economy.
The looming entitlement crisis is the third challenge. As more baby boomers retire, Medicare will slide toward insolvency, and federal spending on Medicaid and other health care programs will skyrocket. CBO estimates that spending on Medicare and Medicaid will grow to 5.9% of GDP by 2017, up from 4.6% in 2007. Social Security will increase to 4.8% of GDP, up from 4.2%. Those will accelerate beyond 2017.
Unless Congress is willing to slow the growth of entitlements, future taxpayers will be saddled with unsustainable budget deficits or massive tax increases.
The new president and Congress must solve these three key tax dilemmas for the construction industry to flourish.